I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.See all posts Frank Gogol
Best Personal Loans With No Prepayment Penalty
Flexibility in your finances can be hugely important in having some breathing room in times of financial difficulty, and this is especially true of personal loans.
The more inflexible the repayment terms, the more likely you will run into trouble repaying your loans.
A prepayment penalty is a fee assessed when you pay off your loan earlier than the repayment term requires. This is the exact kind of inflexible loan term that you want to avoid.
This article discusses what prepayment penalties are and the best personal loan lenders with no prepayment penalties.
What are Prepayment Penalties?
Prepayment penalties are a fee that lenders levy against borrowers when they repay their loans before the scheduled loan term.
Personal Loan Prepayment Penalties
For a personal loan, you will agree to a certain set loan term, over which you will repay the principal amount, plus interest.
So, let’s say you take out a $5,000 loan at 10% interest, and have a loan term of 2 years. You agree to 24 monthly payments of $230.
Then, let’s say you have a cash windfall, or earn a bonus at work after one year, and decide to pay down the full amount at that point. This would save you hundreds of dollars in interest.
However, if the lender charges prepayment penalties, these penalties could cut into this savings, or swallow it entirely.
Why Do Lenders Charge Prepayment Fees?
Lenders earn money by charging interest, and the longer the loan term, the more interest will accumulate. If you pay off your loans early, the lender is losing out on the interest payments for the remainder of the loan.
Since the earnings from this interest are factored into the terms and interest rate that the lender initially offers, some lenders reserve the right to charge a fee if you pay off your loans early.
How Much Are Prepayment Penalties?
The cost of prepayment penalties varies greatly, depending on how the lender chooses to calculate the penalty, as well as the type of loan and the length of time left on the loan term.
The three main ways that prepayment penalties are calculated are:
- Percentage of balance: Let’s say you try to pay off the full remaining balance on a 5-year loan term after 4 years. The lender may charge a certain percentage of the remaining balance that you pay off at that point as a prepayment penalty.
- Remaining interest: Taking the same example of paying off a 5-year loan after 4 years, a lender may, instead, charge you 1 year’s worth of interest payments
- Flat fee: Other lenders, rather than tying the penalty to the amount of interest or balance left over, simply charge a flat fee for any borrower that pays off a loan early.
Do All Loans Come with Prepayment Penalties?
No, not all loans have prepayment penalties. Some lenders charge prepayment penalties while others do not.
Best Lenders for Personal Loans With No Prepayment Penalty
If you want to maximize your financial flexibility and give yourself the option of paying off your loans early, you should seek out a lender that offers no prepayment penalty personal loans.
There are several prominent lenders who do not charge prepayment penalties, and we have listed some of the most well-regarded in the following section.
LendingClub offers personal loans with no prepayment penalties as well. Rather than functioning as a traditional lender, LendingClub is a peer-to-peer lender, which involves pairing borrowers with individual lenders who provide the funds for loans.
LendingClub is the largest online lender for personal loans in the U.S. However, LendingClub also has fairly high standards and loans primarily to borrowers with high incomes or good credit scores.
LendingClub’s no prepayment penalty loans at a glance:
- Interest rates: 8.30% to 36.00%
- Max loan amount: $40,000
- Max term length: 5 years
>> Learn more about LendingClub
SoFi is another of the most prominent online lenders that offer no prepayment penalty loans.
SoFi offers larger amounts than Stilt and LendingClub, topping out at $100,000. However, their eligibility criteria are steep, with the average borrower with Sofi earning more than $100,000 per year.
SoFi offers flexibility with its terms, however, including no late fees and hardship protections.
SoFi’s no prepayment penalty loans at a glance:
- Interest rates: 7.99% to 23.43%
- Max. loan amount: $100,000
- Max. loan term: 7 years
>> Learn more about SoFi
How to Get a Personal Loan With No Pre-Payment Penalty
In the realm of personal financing, a personal loan without a pre-payment penalty can be a powerful tool in managing your financial portfolio. This feature allows you the flexibility to pay off your loan early without incurring additional costs, making it an attractive option for borrowers who anticipate future cash flow changes or simply desire the freedom to clear debt ahead of schedule.
Understanding No Pre-payment Penalty Loans
When a loan has no pre-payment penalty, you are free to pay more than your minimum monthly payment or even pay off the entire loan early without being charged an extra fee. This contrasts with loans that do impose a penalty, where the lender charges you a fee for the lost interest they would have received had you carried the loan to term.
Step 1: Shopping for the Right Loan
As you explore personal loan options, confirm with lenders whether they enforce pre-payment penalties. This should be clearly stated in the loan agreement. Opting for a loan without this penalty provides the advantage of saving on interest should you choose to pay the loan off early.
Step 2: Analyze Your Financial Goals
Your financial goals play a significant role in deciding whether a no pre-payment penalty loan is right for you. If you’re planning to use this loan for a substantial one-time expense—like a down payment on a house—and anticipate that you might come into more money in the near future (perhaps from a bonus or a tax return), a no pre-payment penalty loan gives you the liberty to pay down this debt quicker.
Step 3: Assess Interest Rates and Terms
While the absence of a pre-payment penalty is beneficial, it shouldn’t be the only consideration. Compare interest rates, the total cost of borrowing, and other terms and conditions of the loan. Sometimes, loans without pre-payment penalties might come with higher interest rates or fees, so you’ll need to do the math to see if it’s worth it in the long run.
Step 4: Application and Approval Process
Once you’ve chosen a lender, the application process begins. This usually involves providing personal and financial information, such as your income, employment verification, and credit history. A strong credit score and stable income can help you secure a lower interest rate, even on loans without pre-payment penalties.
Step 5: Utilizing the Loan Strategically
If your loan application is successful, and you receive the funds, have a plan for how you’ll use the loan—and how you’ll pay it back. Even without pre-payment penalties, it’s crucial to manage the loan responsibly. Create a budget that includes your loan payments and stick to it, while also setting aside any extra funds you can to pay down the loan early.
Step 6: The Pre-payment Decision
If you decide to pay off your loan early, notify your lender of your intention and make sure you understand the process. Some lenders may require a written statement or a specific procedure for pre-payment. Be aware of any final payoff amounts or procedures to ensure the loan is properly closed out.
Loans That Might Have Prepayment Penalties
Various types of loans sometimes have prepayment penalties, including:
Prepayment penalties are most commonly imposed by mortgages. Although these penalties have become less common after the 2008 housing crisis, there still exist various mortgage loans which impose an appreciable fee, which can amount to thousands of dollars.
In most cases, the prepayment penalty is not imposed when you put small amounts of money toward your loan principal. However, if you pay off a large amount at once, or finish the entire loan within a short span of time (say, a few years), your lender might impose a penalty on you.
The actual amount of the penalty is dependent on the lender. These fees could be calculated based on the lump sum or the amount pending to be paid back. Not to forget, various states also place financial limits and additional time on these fees.
Although mortgages are commonly known for imposing penalties, you can encounter similar penalties on various other kinds of loans too. Auto loans, for instance, often come with a prepayment penalty section.
You can find a similar clause on personal loans as well. However, there are various personal loan lenders like Prosper, Discover, and Wells Fargo which advertise that they don’t impose any such fees.
Are Prepayment Penalties Always Legal?
If you hate prepayment penalties, you are not alone. In fact, prepayment penalties are considered to be a risky loan feature by the Consumer Financial Protection Bureau. Following this, the agency made strict rules in 2014 on how much a lender can charge in penalties.
It is important to mention here that strict rules have been imposed on prepayment penalties so much so that some states have completely banned these penalties irrespective of the type of loan.
However, not all banks are regulated by state law and some banks also operate under federal law. This is why it is highly recommended to check with your loan provider regarding their policies.
How to Avoid Prepayment Penalties?
If your lender has included any prepayment penalty clause in your loan, it will be there in your loan estimate and also in your closing documents. This is why you must read your loan documents properly to avoid any unforeseen events and surprise expenses.
The clause about the penalty might be hidden in the section called the Addendum to the Note. Thus, read Addendum very thoroughly.
If your loan has any penalty of this kind, your contract must have it. Before signing on the dotted line, read everything about the penalty closely. Do not forget to negotiate the fee away.
Additionally, if your loan comes with a prepayment penalty, you should also ask for alternative options with no such penalties. This will help you in comparing your options better. However, if your lender doesn’t provide any such options, you can always change your mind and get better options from other lenders.
If the prepayment penalty seems to be inevitable, in such cases you must talk to your lender clearly and get your doubts cleared, if any.
Here are a few questions that you must seek answers for:
- Under which circumstances is the prepayment penalty applicable?
- Do I need to pay the penalty only on a full payment or if I make extra partial payments too? If the early payment penalty is applicable on partial payments too, how much can I pay off before the fee is levied?
- If a mortgage loan offers a prepayment penalty, is it applicable on refinanced or sold?
- How much is the exact early payment fee and how is it calculated?
How to Deal with Prepayment Penalties on an Existing Loan?
If you already have a loan but are not sure if it includes a penalty clause or not, then it is the right time to check your closing documents, loan coupon book, account statements, and other communication that you might have received from the lender. If you are still not sure, you should ask your lender.
If you have already accepted a loan with a prepayment penalty, there is nothing much that could be done. However, you can put your best foot forward by knowing about the actions which will trigger this penalty, and doing your best to avoid them.
You can talk with your lender to discuss the involved mathematics. Then, do some calculations to find out what it will cost you if you get it refinanced or pay it off early. If this helps you in saving money in the long run, you should go for it.
- Soft Inquiry Personal Loans: What They Are + Your Options
- How to Get a Personal Loan with No Cosigner
- The Ultimate Guide to Loan for Pilot Training
- Online Loans with Monthly Payments
- Personal Loan with a Cosigner
Bottom Line on Prepayment Penalties on Loans
The quicker you get out of debt, the better, and yet prepayment penalties disincentivize doing exactly that. One of the cardinal rules of debt management is using unexpected cash windfalls to pay off debts. If you are stuck in a loan with prepayment penalties you lose the ability to do this, and any financial flexibility that would come with it.
Any debts which accumulate interest should be paid off as quickly as possible, so finding a lender with no early payment penalty loans is extremely valuable.
For example, if you take out a second personal loan with a lower interest rate than your first loan, you may benefit by paying off the first loan with the second loan. This would only make financial sense, however, if the first loan has no early payment penalty.
Make sure you read the fine print and investigate whether any lender that you consider charges prepayment penalties. There are plenty of lenders out there with no prepayment penalty on personal loans so you should have no trouble finding one that fits your needs.